If the VAT threshold lowers, then small businesses may face another administrative burden while they are already adapting to many other changes.
Professional tax bodies have expressed concern about a lowering of the £85,000 VAT threshold without the provision of extra help to ensure that small businesses can make a smooth transition to becoming VAT-registered.
Alan McLintock, Chair of the Indirect Taxes Subcommittee of the Chartered Institute of Taxation (CIOT) said: “The high VAT threshold is a vital simplification measure for small businesses. The primary reason that many businesses manage turnover to remain under the VAT registration threshold is the fear that their non-VAT registered competitors will undercut them. For example, a non-VAT registered decorator can submit a decorating quote for £2,000, but the VAT-registered equivalent would need to charge £2,400 inclusive of VAT.”
Mr McLintock went on to say that having a graduated VAT cost for a growing small business could smooth its transition to registration. While the standard VAT rate of 20% would apply, the business would only pay half of this to HMRC, allowing it to remain competitive with its rivals.
The Low Incomes Tax Reform Group has also shown concern. VAT is based on a business’ turnover rather than its profits, so a small business with a low profit margin would find itself having to deal with VAT on a day-to-day basis. This would affect its competitiveness, especially in a market in which most businesses are not VAT-registered. The group also warned that if the threshold is set too low, then some small businesses that are currently compliant could fall victim to the hidden economy.